The central bank's interest rate hike bets are heating up. When will the Japanese yen's upward momentum pause?

As global central bank policies become increasingly divergent, the differing interest rate decisions between the Bank of Japan and the Federal Reserve are reshaping the foreign exchange market landscape. The Japanese yen, as a safe-haven asset, has recently appreciated, attracting the attention of many investors. Especially after the recent hawkish comments from Bank of Japan Governor Ueda Kazuo, market expectations for a rate hike have been strongly fueled.

In a recent public speech, Ueda Kazuo stated that the Bank of Japan will carefully weigh the pros and cons of raising interest rates in December and will make a final decision based on economic data performance. This statement triggered a chain reaction in the market, widely interpreted as a clear signal that a rate hike is imminent. Economists at BNP Paribas even said that Ueda’s speech was almost equivalent to announcing a December rate increase.

Ueda Kazuo’s Hawkish Signal, December Rate Hike Probability Surges Past 80%

Market participants reacted swiftly to expectations of a BOJ rate hike. Data from the overnight index swap market shows that investors’ bets on a December rate increase have risen to over 80%, hitting recent highs. This rapid escalation of expectations reflects the market’s strong confidence in Ueda’s hawkish stance.

Several international investment banks, including Barclays and JPMorgan Chase, immediately adjusted their forecasts for the BOJ’s policy direction, moving the expected rate hike from January next year to December. This consensus further bolstered market confidence in a near-term rate increase.

However, US investment bank Goldman Sachs remains relatively cautious. Its analysts believe that the BOJ may still need to observe further developments in key economic indicators, such as corporate wage data, before making a decision. Therefore, Goldman leans toward the possibility of a rate hike in January, with December not yet a certainty.

Narrowing US-Japan Interest Rate Differential Accelerates Yen Appreciation

On the other hand, the Federal Reserve is showing an entirely opposite policy stance. Market bets on a rate cut by the Fed in December have risen to nearly 90%, contrasting sharply with the BOJ’s rate hike expectations.

This divergence in monetary policy between the two countries is directly reflected in the narrowing interest rate differential. As the US-Japan spread shrinks, the carry trade logic that previously profited from interest rate differentials is being overturned. Over the past few years, investors have borrowed yen to buy dollars to earn the interest rate spread, but this strategy is now reversing, leading to large-scale unwinding.

Coin Bureau analyst Nic Puckrin pointed out that the recent rapid appreciation of the yen has once again impacted market dynamics. He said that yen carry trades are restarting their unwind mode, further boosting the yen’s strength. This self-reinforcing cycle creates a positive feedback loop: rate hike expectations → interest rate differential narrows → carry trades unwind → yen appreciates → further unwinding triggers → yen continues to rise.

Will the Yen Remain Strong into Early 2026? Multiple Institutions Offer Divergent Views

Regarding the future trend of the yen, different market institutions have varying opinions. Lee Hardman, an analyst at Mitsubishi UFJ Financial Group, stated that with the continued rise in expectations for a BOJ rate hike, the yen faces the potential for sustained strength. He predicts that by early 2026, USD/JPY could fall to around 150, implying further appreciation of the yen from current levels.

USD/JPY briefly dropped to 154.66 in early December, hitting a two-week low, which confirmed the yen’s upward momentum. If the trend continues, breaking below 150 will become the next key level to watch.

The sustainability of the yen’s appreciation will still depend on multiple factors: whether the BOJ’s rate hike occurs as expected, how the Fed’s rate cut progresses, and whether global economic conditions change. Investors looking to capitalize on the yen’s rise should closely monitor these key variables.